In March, Fitch released a draft detailing revisions to its ratings system for not-for-profit CCRCs, resulting in continuing concern in the industry. Here is Jack Cumming’s commentary on the reaction — and how the industry could respond instead.

By Jack Cumming

You’ve likely heard of Fitch ratings. The CEO of your senior living enterprise may have boasted of the company’s ratings — seldom the best, but often a point of pride.

Fitch offers four “investment grade” ratings:

  • AAA: the best quality companies, reliable and stable
  • AA: quality companies, a bit higher risk than AAA
  • A: economic situation can affect finances
  • BBB: medium-class companies, which are satisfactory at the moment

Fitch adds to this seven “non-investment grade” ratings and goes further to add plusses and minuses to its many grades. In general, though, investors should stick with investment-grade enterprises. Fitch exists as a private analytical agency to assess the risks involved in investing in or lending to enterprises like senior living.

Risk Assessment

Like auditors, Fitch and other “rating services” claim to be independent, though they are paid by those they rate. What they do is similar to what Equifax, Experian, and TransUnion do for consumer credit. The “big three” ratings agencies are Moody’s Investor Services, S&P Global Ratings, and Fitch Group.

To establish a reputation for independence, Fitch and others are reasonably transparent about their analytical criteria and the mechanics of their assessments. Fitch emerged into prominence in recent decades for being willing to be more demanding — i.e., more conservative for investors — in its ratings assessments. Since those seeking investors — providers, in the case of senior living — pay for their ratings, the ratings firms have an incentive to give favorable ratings. Fitch has been refreshing in resisting that temptation.

Reality Check

Fitch is now taking a sharper look at the many challenges faced by not-for-profit CCRCs, and the rating agency has identified a number of financial challenges that the industry faces of which investors should be wary. It’s not Fitch’s responsibility to shield the industry from reality. Nor can Fitch be both independent and protective of its clients.

Fitch’s responsibility is to stakeholders who rely on its assessments. Like auditors, Fitch has no moral or ethical responsibility beyond a relentless commitment to fair presentation of its assessments. Unlike in auditing, a rating agency is free to follow its principles to present the fairest risk picture it can. Auditors, in contrast, are bound by “codifications” and “guidance.”  Facing reality can be challenging. It’s difficult to act responsively. Denial can be more comfortable.

Implicit Fitch Findings

In its current reassessment of not-for-profit CCRC businesses, Fitch sets out three areas for concern. Top among those concerns is “revenue defensibility.” Fitch defines revenue defensibility as the ability of a company or entity to maintain its revenue when faced by exogenous or endogenous challenges.

For instance, many CCRCs are facing occupancy challenges as advances like ride sharing and technology make staying put an increasingly attractive alternative. Responding to that challenge would require rethinking the substance of the CCRC model, but many enterprises resist anything that fundamental, preferring instead to emphasize sales and marketing of their established offering. That’s risky.

“Operating risk” is a second major concern, especially as regulatory pressures on skilled nursing make that an ever less attractive business. This includes downward pressure on reimbursement rates combined with mandated staffing ratios that put a chill on the potential for technology to improve quality while increasing staff productivity. Fitch has identified skilled nursing as a concern focus.

The industry’s “financial profile” is a third area that concerns the Fitch analysts. Not-for-profits lack access to equity markets. Some have long relied on entrance fees as a source of “equity” capital to secure debt, but entrance fees are not sold as “equity securities,” and residents can reasonably consider entrance fees as contract consideration to be reserved for contract fulfillment.

Of course, the Fitch exposure draft is much more nuanced than this. We might view it as the next step from the Government Accountability Office’s assessment nearly 15 years ago that CCRCs are “not without some risk.”  Even then, it was evident that those words were carefully crafted not to stir too much controversy.


It would have been better if the industry trade associations had then responded to try to eliminate that “not without risk” qualification. Now Fitch has provided a second heads-up. The survival of the CCRC aging model may depend on it. The early indication is that LeadingAge, at least, is shocked and a bit bewildered.

Not surprisingly, the industry, represented by LeadingAge, is pushing back and asking for reconsideration. Fitch’s concern, though, is with risk and not with promoting the vested interests of the industry. In May 2010, officers of the National Continuing Care Residents Association met with LeadingAge’s Steve Maag to discuss financial concerns about CCRCs. Ultimately, the response then was that LeadingAge had no financial committee or expertise.

Cavalier Finances

That’s still true as LeadingAge opens its response to Fitch with an admission: “Please note that, we recognize that LeadingAge is not a firm that specializes in capital markets or financial analysis.” The letter then states, “LeadingAge is uniquely positioned to engage with Fitch on the potential social impact of the proposed ratings criteria changes.”

That’s an intriguing claim. CCRCs primarily cater to affluent aging people who have to demonstrate their wealth as a condition of their admission. LeadingAge decries the increase in the cost of debt that will ensue if investors recognize the financial risk inherent in not-for-profit CCRCs.

Of course, it’s not stated that directly, though that’s my sense of the purport. The implicit assumption seems to be that not-for-profits, ipso facto, are good and should have the financial benefits of tax exemption and low interest rates. But, LeadingAge represents providers, while residents and debt investors are the ones placed at risk. Sadly, that 2010 reaching out to LeadingAge by residents bore no fruit.

One Resident’s Perspective

How might this look to a financially astute resident concerned by:

  1. The industry’s condoning of negative balance sheets, euphemistically referred to as “negative net asset positions”?
  2. The plight of middle-income and indigent aging people who see tax exemption awarded to CCRCs catering to market rate, affluent seniors?
  3. The absence of financial concerns as an overriding principle for the industry’s trade associations?

Just asking this question reveals how obvious the answer is. Residents come into these CCRCs trusting that they are responsibly funded to provide the promised benefits and that residents can trust their well-being for the rest of their lives to those promises.

LeadingAge is not just a trade association for providers, which would call for qualification under Internal Revenue Code 501(c)(6). LeadingAge is qualified under 501(c)(3). 501(c)(3) qualification requires a charitable, religious, educational, and similar purpose, while 501(c)(6) organizations promote business interests.

It’s time for LeadingAge to become a consumerist organization beyond merely a lobbying organization for providers’ business interests. That could start by taking seriously the risks that the Government Accountability Office, and now Fitch, have identified. The future of the industry is at stake. All businesses, including CCRC businesses, need customers — residents, in the case of CCRCs — for their existence.